> If the the market for insurance is "too efficient" at determining who is high-risk and who is not, then it is no longer fulfilling its social function.
Then we need to break whatever that social function is away from the umbrella of "insurance." Mandatory car insurance is predicated on the fact that you can pay enough on average to cover your damages to others but might not be able to do so in the worst case. If we're in a world where somebody's driving exceeds the external damage bounds they can afford _even on average_, subsidizing those people is no longer the job of insurance.
Mandatory car insurance is essentially a welfare benefit. The benefit is just administered by insurance companies, because they are believed to be more efficient than the government. (This is pretty common for all kinds of benefits around the world.) Mandatory insurance is not a private contract two parties have reached at their own initiative, and the usual business considerations don't apply. If an insurance company wants to provide mandatory car insurance, they must follow government policies, not their own policies.
If someone drives recklessly and causes excessive damage, the government has other tools beyond insurance premiums. They can, for example, revoke the license and confiscate the car. Or issue a fine or put the driver in prison.
Mandatory car insurance, in theory, moves money from drivers (proportional to the risk they represent) to victims (proportional to the damages caused), plus a cut for the insurance company.
I'm missing something in your flow of ideas. Is it a welfare benefit because that idealized theory of insurance is itself a welfare benefit or because when insurance is mandated it doesn't live up to expectations?
The insurance is mandated, and the focus is more on guaranteed benefits to the victims than on fairness for the people paying them.
If you can't afford to pay for the damages you caused, that's your problem. You took the risk, and now you face the consequences. There is no reason to make the insurance mandatory to prevent that. But if the victim doesn't get any compensation because you can't afford to pay, that's a public problem. Now there is a reason to make the insurance mandatory, and it's particularly important that the riskiest drivers have insurance. If you make it too expensive for them, they may choose to drive without insurance. Which is exactly what you wanted to avoid in the first place.
> If we're in a world where somebody's driving exceeds the external damage bounds they can afford _even on average_,
Does this have any meaning at all? I think you are too busy thinking about cars and not people.
If a pedestrian is hit and crippled for life, the damages are more than you can afford for majority of the population.
Many accidents are random chance, caused by factors that cannot be controlled (weather, random technical failure, etc) and lethal accidents do not tend to repeat.
I think we agree about the nature of accidents -- they have some chance of occurring, the damages are often more than any one person can afford, and beyond a probabilistic assessment you have no way of knowing exactly how many wrecks will happen or what the damages will be.
My point is that you _can_ analyze those accidents probabilistically. Somebody who practices defensive driving, never drives over 25mph in a residential, only drives in broad daylight, and only travels 500 miles per year will have a very different baseline, both in number and severity of accidents, than somebody who habitually blows through residential stop signs at 60+mph and drives 50,000 miles per year.
Insurance concerns itself with flattening those spiky probability distributions. The first person will likely never severely injure a person even if they get in an accident, just from the difference in miles driven they're going to be in 100x fewer accidents per year, and probably much better than that because of their other safety practices (call it an additional 2x factor).
Just to have some hypothetical numbers to play with, the safer driver has an average of 0.001 wrecks per year, and the average damages might be $20k (fender benders, minor hospitalization, ...), so they have about $20/yr worth of risk to insure against (yes, I know you have to integrate over probability of different types of wrecks or whatever; this is a simple HN comment with ballpark numbers). The dangerous driver has 0.2 wrecks per year, and the average damages might be $100k (total both vehicles, major hospitalization, ...), so they have $20,000/yr to insure against.
_Insurance_ concerns itself with factoring in those relative risk profiles (along with the time value of money and whatnot; it gets a bit complicated) and guaranteeing that the individuals only have to pay their flat premiums (and optionally a flat deductible per wreck, though a decently high deductible is a good idea for most people) instead of risking bankruptcy and then some (it's the "and then some" that made car insurance mandatory in the US -- ensuring that the unlucky person you crashed into can still be made as financially whole as possible).
And that's all I meant with the "even on average" comment. If the safe driver's premiums were a bit more than $20/yr, and the dangerous driver's premiums were a bit more than $20,000/yr, that would be _fine_ from an insurance perspective.
The person I was replying to was talking about the "social function" of insurance, and my real point is that if the social function is to allow that dangerous, more expensive driver to continue to drive (not necessarily as bad of an idea as it sounds in the abstract -- if they couldn't legally drive, would they do something more dangerous or less insured instead? is it worth the additional costs we inflict on people when driving is nearly mandatory but we just won't let them?), _insurance_ isn't the tool to enable them. We should be thoughtful and explicit when providing those sorts of subsidies, instead of hiding and burying them in a tangentially related financial instrument.
Mind you, going 1-2 comments up the chain and referring to the data collection, I still think that's bad for other reasons, and using "too complicated" of models (under the assumption that they'll likely never be analyzed by a real person and have a chance of being egregiously wrong) isn't great either, but pricing insurance based on what you know about a person isn't bad in and of itself.
Then we need to break whatever that social function is away from the umbrella of "insurance." Mandatory car insurance is predicated on the fact that you can pay enough on average to cover your damages to others but might not be able to do so in the worst case. If we're in a world where somebody's driving exceeds the external damage bounds they can afford _even on average_, subsidizing those people is no longer the job of insurance.